Activist Investors in Europe: Who will they target next?

Article by A&M

The COVID-19 pandemic has reconfigured the landscape for investor activism across Europe. Companies have seen their operations hugely disrupted and their markets transformed almost overnight; for many, the financial impact has been significant. In the face of this systemic shock, corporate performance has varied markedly.

This has created an attractive hunting ground for activists, highlighting winners and exposing weaker companies that offer activists an identifiable route to increased shareholder value.

Six key themes at a glance.

A&M’s Activist Alert (AAA) has identified six core themes that summarise our predictions for investor activism in Europe in 2021.

1. A resetting of the battlefield and an increase in the number of European corporates predicted to be targeted by activist investors

The COVID-19 pandemic has reconfigured the landscape for investor activism across Europe. Companies have seen their operations hugely disrupted and their markets transformed almost overnight; for many, the financial impact has been significant. In the face of this systemic shock, corporate performance has varied markedly.

This has created an attractive hunting ground for activists, highlighting winners and exposing weaker companies that offer activists an identifiable route to increased shareholder value.

As a result, the number of companies predicted to be at risk of becoming public targets for activist investors has increased.

2. Activism has slowed this year - however, this is a temporary respite and activist forces are building, with a ‘crunch time’ approaching for underperforming companies

Although the market turmoil from COVID-19 has undoubtedly created opportunities, public activist campaigns have yet to return to their pre-pandemic levels. 50% fewer new campaigns were launched in Q2 2020 compared with a year earlier, and whilst Q3 saw some pick-up, the number of campaigns was still 30% down for the year to date.

We believe most activists are biding their time, conscious of the risk of appearing  “tone deaf” to the unfolding public health crisis. Nevertheless, they continue to circle the weaker performers, quietly building non-disclosable stakes and preparing their campaigns.

3. As the wave of activism returns, there will be a greater focus on the U.K.

In the lead-up to the first wave of the pandemic, activism against Continental European targets was growing rapidly as investors became increasingly confident and ambitious in their campaigns.

However, COVID-19 has, to an extent, reset this landscape. While we expect activist interest in Continental European companies to endure, it will be somewhat eclipsed by a renewed focus on U.K. targets in the months ahead.

The crisis has had a serious impact on U.K. corporate performance and given the country’s activist-friendly governance and regulatory environment, we expect interest in the U.K to significantly rebound.

4. Activism campaigns will focus more on the need for operational transformation

A&M analysis of 245 public activist campaigns since 2017 has shown that those that focused on the need for operational transformation generated share price performance that was 3.4% higher than market indices.

This contrasts with campaigns focused on seeking a change in governance which underperformed market indices by 2%.

This clear outperformance combined with the need to fundamentally reassess and restructure corporate operating models will lead to greater demand from activists for operational transformation.  

5. Technology and healthcare will join industrials as the most attractive sectors for activists

Whilst industrials are predicted to remain the most targeted sector, the number of targets in technology and healthcare has increased considerably.

We predict that activity in these sectors will intensify, although when it comes to healthcare, activists will need to pick their fights and plan their campaigns carefully given the positive market and public sentiment enjoyed by many companies in that space.

6. Environmental, Social and Governance (ESG) campaigns will become bolder and more common

Corporates will continue to face ever greater pressure to address social and environmental issues. Such pressure has intensified through 2020 with a record number of such ESG focused resolutions, and we predict that activist funds will not be shy in building on that market sentiment into their campaigns

Outlook for 2021 – in more detail

  • At risk’ companies – COVID-19 fallout increases in number
  • Campaigns– ‘crunch time’ approaching after a lull in activist activity
  • U.K.– resurgence of interest in targets
  • Operational transformation – key focus of campaigns
  • Industrials, tech and healthcare – in the activist crosshairs
  • ESG– becoming a key focus of activism

Our AAA model identifies 161 companies that we believe are at significant risk of public shareholder campaigns, slightly up from 158 at the time of our last report in December 2019.  

However, the number of activist campaigns launched so far this year has declined as these investors paused activity to assess the market turmoil.

As we move into 2021 – and despite the continuing effects of the pandemic – we predict that the numbers will rebound as activists return to the public stage and deploy capital in earnest once again. We also forecast more campaigns advocating operational transformation programmes including M&A to release greater value from underperforming companies.  

In addition to a resurgence of interest in the U.K, the sectoral mix will also change with consumer-focused companies falling further out of favour.

We believe that the COVID-19 disruption to areas such as hospitality, physical retail and travel has left much of the sector too deeply damaged to be of immediate interest to activist investors, who typically focus on underperforming companies that have a clear path to recovery – a good company that can become great is the ideal target.

Instead, we expect more activist campaigns to target industrial, technology and healthcare companies. The number of predicted targets among industrials increased again in this latest analysis and this sector now accounts for 38% of all “at-risk” companies.

Predicted technology-sector targets have also increased after the gap between the strongest and weakest performers widened during the pandemic. Given the potential to generate high returns on capital, we predict increased activist interest in this sector, whose members now make up 18% of all predicted targets.

Healthcare companies are also expected to attract activist attention over their profitability. Although sentiment towards them is generally positive, those companies that have taken this for granted will come under pressure during 2021.

There are strong indications that ESG issues will play an increasingly important role in activist campaigns.

Governance has always been an important consideration for activist investors, but there is ample evidence that environmental and social issues have become much more prominent during the COVID-19 crisis.

These issues are now behind a growing number of campaigns against boards by mainstream institutional investors, including the recent shareholder vote against consumer goods giant Procter & Gamble on environmental grounds. Activist investors will hope to harness these ESG-related trends to build broader support for future campaigns.

The pandemic has hit businesses hard and caused big losses in many institutions’ equity portfolios. Although there has been a relative lull in activist campaigns, the COVID-19 disruption means that next year is likely to signal “crunch time” for many companies that have underperformed during the crisis.

For more information:

www.alvarezandmarsal.com/insights/am-activist-alert

Malcolm McKenzie

Managing Director and Head of Corporate Transformation Services, Europe

+44 20 7663 0433

mmckenzie@alvarezandmarsal.com

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